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November 26, 2010

November’s Closed-End Fund Theme: Volatility in Muni Bonds

The story in closed-end funds in November has been the volatility in the municipal asset class. Municipal bond closed-end funds have experienced not only price losses, down 6.5% month-to-date (MTD) as of Nov. 16, but their discounts have widened out 3.53% on unusually high levels of volume. The market is reacting to investors’ perceived risk created by stressed budgets for most municipalities. Additionally, the uncertainties about future tax rates are weighing on the asset class.

Volume: Municipal bond closed-end funds had an eventful time in the week ending Nov. 16. Over the past 12 months municipal bond closed-end funds have traded approximately $100 million per day. Between Nov. 9 and Nov. 16, municipal bonds have averaged $371 million in trading daily, hitting a 12-month one-day high of $514 million traded. During that time period municipal bonds have widened 3.7%.

Market Wrap-Up: The RiverNorth Closed-End Fund Index returned -2.51% as of Nov. 16, and -0.32% since Sept. 30, 2010. The S&P 500 has returned -0.27% MTD and 3.53% since Sept. 30, 2010. The Barclays Capital U.S. Aggregate has returned -0.79% MTD and -0.43% since Sept. 30, 2010.